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Whether your small business owns one or 100 rental properties, you must keep track of the income and expenses for each one. The financial transactions for all your properties are disclosed on your annual income tax return. You can use the expenses and depreciation deduction to reduce the gross income and lower your tax bill. It’s important to keep detailed accounting records so you can back up your figures, should the IRS decide to audit your return.

Rental Property Income

The IRS expects you to disclose all the rental income you receive, whether it’s collected on a daily, weekly or monthly basis. If you have a Laundromat on site, you must fully account for that income. When a tenant pays to cancel a lease or if tenants pay their rent in advance, you must include that as rental income. If tenants pay a separate amount for your expenses, such as water, trash pickup or grounds maintenance fees, you must declare those amounts as income.

Rental Property Expenses

You can deduct the expenses that directly result from your rental property operations. Mortgage interest and property taxes are fully deductible expenses. Professional fees for legal, accounting and bookkeeping services are deductible. Property insurance, utility expenses for common areas and on-site security are deductible. Fees paid to a property management firm or an on-site manager are also deductible. You can deduct your repair and maintenance costs as long as they do not increase your property’s value. Work performed on the property to improve it or adapt it for a new use is a capital improvement. The amount is depreciated over the life of the property instead of expensed.

Rental Property Depreciation

Rental property depreciates from the time it first produces income until you recover the full acquisition cost, sell it or stop using the property. You calculate your annual depreciation amount using the Modified Accelerated Cost Recovery System per IRS regulations. You can use the straight-line depreciation method to deduct the same amount annually. As an alternative, you can use the declining balance method and deduct more of the acquisition costs upfront.

Accounting Considerations

Your small business can use the cash or accrual method of accounting. If you use the cash method, you recognize income when you receive your rent payments and recognize an expense when you pay a bill. Under the accrual method, income is recognized when it is earned and not received. You recognize income when the rent is due, not when the payment is received. Because of this, you can deduct an uncollectable rent check from your gross income.

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About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.